Question

Now discuss with suitable examples how the issue price of bonds payable is determined? When does the issue price results in a discount issue or a premium issue? What are the two methods of amortization of bonds discount/premium and how they are different from each other? What are the accounting issues when bonds payable are issued between the interest dates and when bonds payable are extinguish?

Answer 1

How the issue price of bonds payable is determined?

The issue price is the Present Value of the Bond which is calculated by taking thee following into account:

1. Periods to Maturity

2. Maturity Value

3.Coupon Payments

4.Yield to Maturity

When does the issue price results in a discount issue or a premium issue?

Discount issue

When the Coupon Rate is less than the Market Rate

Premium issue

When the Coupon Rate is greater than the Market Rate

Two methods of amortization of bonds discount/premium

1. Effective Interest method

2. Normal Interest and Payment method

Accounting issues when bonds payable are issued between the interest dates and when bonds payable are extinguish?

1. Difficulty in compounding the interest rate or yields to maturity.

2. Use of wrong yield to maturity

Step-by-step explanation:

Each requirement of this question is explained above.